Stock Buyback Tax is 'Silly Mistake': Charles Ellis

“You hit the hot button!” exclaims legendary investment strategist and consultant Charles “Charley” Ellis, author of the classic bestseller “Winning the Loser’s Game,” in an interview with ThinkAdvisor.

The former CFA Institute chair is referring to the new 1% excise tax on stock buybacks for companies, which is part of the Inflation Reduction Act signed into law Tuesday. “This is Congress making a silly mistake. It looks like someone decided almost for spite to put a 1% tax on [buybacks],” he says. 

The tax’s impact? It will, on a small scale, “reduce the rate of growth of our economy and distort the decisions made by corporations,” he forecasts.

Ellis, 84, who founded Greenwich Associates, the famed research and consulting firm to large global institutions and which he led for 30 years, has just published his 19th book.

“Figuring It Out: Sixty Years of Answering Investors’ Most Important Questions” (Wiley, Aug. 9) covers a wide range of issues about which Ellis has provided his expert insight over the past six decades. (It includes a 20-page chapter on stock buybacks.)

A leading proponent of indexing, he is baffled, if not confounded, that so many investors “honestly believe that what they should be doing is beating the market,” he says.

Instead, “if you’d like to be in the top 25% over a 10-, 15-, 20-year period, the answer is indexing,” according to Ellis.

Amid market volatility, a widely anticipated recession and chaotic world events, Ellis recommends studying economic and market history to avoid being rattled by recent news and information.

“We ought to be more coldblooded, independent-minded, rigorous in our thinking,” he argues.

Ellis was a successor trustee at Yale, where, with David Swensen, he chaired the investment committee. Today, he is on the investment committee of the wealth management firm Rebalance.

In the interview, he highlights the value of financial advisors in developing customized financial plans for clients and reminding them: “Be steady on your plan. Don’t get shaken loose.”

ThinkAdvisor recently interviewed Ellis, who was speaking by phone from his Connecticut office. 

He gave a micro-preview of his next book, “Inside Vanguard,” to be published in October:

“Most people think of [Vanguard] only as a low-cost mutual fund organization. That’s part of it. But it’s not anywhere near the whole truth,” he says.

Here are excerpts from our interview:

THINKADVISOR: What are your thoughts about the new 1% stock buyback tax for companies that’s part of the Inflation Reduction Act?

CHARLEY ELLIS: You hit the hot button! This is Congress making a silly mistake. It looks like someone decided almost for spite to put a 1% tax on [buybacks].

Why do you say that?

It doesn’t have any long-term purpose, and it’s going to get in the way of efficient use of capital. And in a tiny, tiny way, it’s going to reduce the rate of growth of our economy. And it will distort the decisions made by corporations by a little bit.

You wrote an article for the Harvard Business Review in 1965 about “share repurchasing,” or buybacks. The idea was to repurchase stock to revitalize equity. 

Most companies had “never considered” this, you said. Please elaborate on what you think of buybacks today.

[They’ve] now become a very nice tool for managing the balance sheet of a major corporation.

Why in the world would anybody complain, if you’ve got more equity capital than you ought to use, to return it to shareholders through share repurchase and dividends?

It’s freedom to have a disciplined approach to your capital spending.

You frequently ask people, “What’s the most interesting thing that you know?” So what’s the most interesting thing that you know?

It’s that it’s still possible to find large numbers of people who honestly believe that what they should be doing is beating the market.

Everybody’s trying to get top-quintile investment results, and almost nobody gets them and keeps them.

If you’d like to be in the top 25% over a 10-, 15-, 20-year period, the answer is indexing.

In your 1975 paper “The Loser’s Game,” which preceded your book “Winning the Loser’s Game,” you write: “Most money managers have been losing the Money Game. … The burden of proof is on the person who says, ‘I am a winner. I can win the Money Game. 

“[And] because only a sucker backs a ‘winner’ in a Loser’s Game, we have a right to expect him to explain exactly what he’s going to do and why it’s going to work so very well. 

This is not very often done in the investment management business,” you note.

Please explain.

We could do a lot better than we do if we weren’t so focused on making more money and if we were able to think in terms of longer-term investment results rather than how the portfolio is doing week to week, month to month.

Your new book, “Figuring It Out,” is about answering investors’ most important questions over the past 60 years. What’s the most important question you’ve been asked?

One of them is: Why don’t most people have a written investment plan?

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